Prospects for Emerging Markets Aren’t as Bad as You’ve Heard

It’s obvious that emerging markets are facing severe headwinds. 2015 will be the fifth consecutive year of slowing economic growth. The days of break-neck growth in China are gone for good. Global volatility — coupled with strength of the U.S. economy — is making investors retreat to the safety of the U.S. dollar. A direct result has been depreciation in emerging market currencies. Since mid-2014, against the U.S. dollar, the Brazilian Real is down 42%, the Russian Ruble 46%, the Malaysian Ringgit 26%, and the South African Rand 22%. 2015 will be the first year since the 1980s to see capital outflows from the emerging markets exceed capital inflows.

However, today’s events are not necessarily a good guide to longer-term trends. In analyzing the trajectory of emerging markets, it’s critical to look at the broader context in at least two ways.

First, look at developments in the global economy. While the U.S. does remain very robust, the prospects for Europe and Japan are modest at best. Softer prices for oil and other commodities are a big boon to China and India, which together account for almost 40% of the world’s population.

This means that, even in 2015, emerging markets will grow at twice the pace of developed markets. Even after factoring in currency depreciations, their share of the global economy continues to rise year after year. According to the IMF, in 2000 it stood at 21%. This year, it will be almost double — 40%. By 2020, it’ll be 44% and, by 2025, close to 50%. If you want growth, you have no choice but to engage with emerging markets.

The other big reason for longer-term optimism lies in the major structural changes underway in emerging markets.

The population is young. Africa is 10 years younger than the world average. India is nearly 20 years younger than Europe or Japan, and nearly 10 years younger than the U.S. This young population is becoming more literate, informed, ambitious, and entrepreneurial. It’s also more urban. By every measure, on every continent on earth (including sub-Saharan Africa), the quality of both governance and infrastructure is better than it was 10 years ago and getting better.

To be sure, not every emerging market will flourish. But in the aggregate, they will account for half or more of the world economy in ten years. And, they’ll still be growing at 2-3x the pace of the developed markets.

Given this analysis, we have some advice for developed-economy companies. First, make sure to defend your strengths in your home markets. You’ll need the cash flow and the technological strengths they grant you. Two, spread your bets across several of the bigger emerging markets. Three, build deep, rather than shallow, knowledge of at least the major emerging markets. Last but not least, keep track of new competitors from the emerging markets. They maybe your next competitors – and they could also become worthy partners.

Anil Gupta is the Michael Dingman Chair in Strategy, Globalization, and Entrepreneurship at the University of Maryland’s Smith School of Business, cofounder of the China India Institute, and a coauthor of Getting China and India Right (Wiley, 2009).

Haiyan Wang is the managing partner of the China India Institute and a coauthor of Getting China and India Right (Wiley, 2009).